The Point of Points

I have been waiting to exhale this story for many months. We f…i…n…a…l…y have approval to close on a new place; one to more comfortably house this growing family. While I do believe close quarters can produce a tight knit unit, four people in a 700 square foot condo is a bit much – even for me. We’ve opted for closeness with a separate room for munchkins.

The short sale process is complete. A story worthy of a post entirely all its own. I’ll tackle that one later. Today, let’s talk points. I’ve always had a working head knowledge of points, but never seen them in action. Our loan offer included an acceptable interest rate of say, 4.6% with 1.25% in points.

Points represent a sum of money you pay, up front, to receive a lower interest rate on the loan. Some call this pre-paid interest. Points is a misleading term. Generally, points are good things to rack up…cool points, style points for creativity, points on a score board, etc. When talking mortgages, points involves racking up cold hard cash…your cash to be exact.

The offer letter was congratulatory and official. It also appeared permanent. However, I remember a discussion somewhere with some people at some date in my past that reminded me of this point – POINTS ARE OPTIONAL. They are so optional, that when I called my contact at the bank, this person was quite confused when I asked for the rate without points. Confusing stream of emails aside, I finally received a new offer of 0% in points and a reasonable rate of 4.8%.

The new loan saved us $2500 up front (the 1.25% in points * the loan amount) while increasing our monthly payment a cool…wait for it…$20 a month. Of course, there may be instances when buying down your interest rate is the best option. The point of this story is to compare the options, make the best decision for your finances, and know that POINTS ARE OPTIONAL. In our case, this property will eventually be another rental unit, Lord willing, and we don’t plan to live here long enough to recoup the upfront payment.

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